A reverse mortgage can be a good source of money for those over 62; however, despite the benefit of being able to receive a large amount of cash, there are many disadvantages of a reverse mortgage. To get the most out of your reverse mortgage you need to understand the disadvantages of a reverse mortgage.
Disadvanatge 1: Heirs Receive Less Money One of the big disadvantages of reverse mortgages is that your heirs will receive less money when you pass away (Lawson 30). That is because when you get a reverse mortgage the money your heirs would normally receive when they sell your home is instead used to repay the reverse mortgage. If you want to leave your heirs a large amount of money, you may want to reconsider getting a reverse mortgage.
Disadvanatge 2: Closing Costs are High Closing Costs are very high which in one of the big disadvantages of reverse mortgages. The closing costs for reverse mortgages are high because they need to cover mortgage insurance and maintenance fees during the length of the loan, among other costs (Lawson 31). If you are planning on selling your home a few years after receiving your reverse mortgage, a different financing option with lower closing costs may be a better option (Lawson 31).
Disadvantage 3: Interest Rates Can Be Higher Another on or the disadvantages of reverse mortgages is that the interest rates can be higher and are compounded (Masters 44). That means that the money you are borrowing through the reverse mortgage is more expensive. In addition to having higher interest rates, the interest on reverse mortgages is not deductible on your income taxes until you repay the loan, which is normally many years down the road (Masters 44).
Disadvanatage 4: You May No Longer Qualify for Some Government Benefits If you receive your reverse mortgage in one lump sum, you might find it hard to continue to qualify for some need-based government benefits (Leonard 7-9). You may encounter this reverse mortgage disadvantage because the money you receive from your reverse mortgage will raise your amount of liquid assets, which may keep you from qualifying for programs such as Supplement Security Income (Leonard 7-9). Before getting a reverse mortgage, check with all government benefits you are receiving to make sure that the money you borrow through the reverse mortgage will not keep you from still receiving the benefits you are counting on.
Disadvanatage 5: Once Your Home Equity is Gone, it's Gone Many people count on the value of their home to fall back on when times get tough, but when you take out a reverse mortgage you no longer have your home's equity to fall back on. When you get a reverse mortgage, the money you receive from selling your home must be used to repay the reverse mortgage. Therefore, you can no longer think of your home as something you can use to receive money. Before getting a reverse mortgage, make sure you take into consideration this disadvantage of having a reverse mortgage and have enough money to be able to cover any emergencies that occur unexpectedly.
Disadvanatage 6: You Must Occupy Your Home Reverse mortgages require that the home you take out the reverse mortgage on is your primary residence (Lawson 31). In order to avoid having to repay your reverse mortgage, you cannot leave your home unoccupied for longer than a year -- 365 days (Lawson 31). If you must go to a nursing home unexpectedly, just keep in mind that if you are there longer than 365 you will be required to repay your reverse mortgage. While this many not be one of the most important disadvantages of a reverse mortgage, it is still one to consider.
Disadvanatage 7: You May Not Receive Good Reverse Mortgage Terms One of the many disadvantages of a reverse mortgager is that not all reverse mortgages are good for the consumers. If you do not understand how your reverse mortgage works, you may find out that you owe more money than you thought you would. To ensure that you receive good terms on your reverse mortgage, you should get a reverse mortgage that has a nonrecourse clause. The nonrecourse clause protects you and your heirs, because it means that when it comes time to repay your reverse mortgage, you will never have to pay more than the value of your home (Matthews 2-35). Without a nonrecourse clause, you would have to repay the total amount of the reverse mortgage balance, which could be much more than the value of your home if you continue to receive monthly payments for a long period of time.
In addition to a nonrecourse clause, you should never get a reverse mortgage that requires you to transfer the title of your property to someone else. A reverse mortgage should charge you interest on the money you borrow. They should never require you to give away your property title (Matthews 2-35).
